Sticking to a budget is the biggest money challenge Americans said they face, according to GOBankingRates’ 2015 Life + Money Survey. Perhaps the reason so many people find budgeting so difficult is because they’re approaching it the wrong way.
“People usually cringe when you talk about budgets” because they’re considered to be constrictive, said Jim Blankenship, a certified financial planner with Blankenship Financial Planning. The alternative, he said, is a spending plan, which is about choice.
Here’s what you need to know about creating a spending plan that will lead you to a more secure financial future.
How a Spending Plan and Budget Differ
A budget feels like a diet to many people because it creates a sense of deprivation, said Brad Klontz, a financial psychologist and author of “Mind Over Money: Overcoming the Money Disorders That Threaten Our Financial Health.” You have to track your spending and figure out what to cut. It can be painful, he said, so few people do it.
However, a spending plan flips the script. Instead of looking at ways you can cut things out of your life, you figure out how you want to spend your money, Klontz said. “This is a conversation about values, about goals, about what excites you,” he said.
Why Spending Plans Work
If you’ve ever gone on a diet, then you know that you start craving food even more. In essence, Klontz said, you’ve put your body on notice that it won’t be getting as much food, so your brain responds by telling you to stuff your face.
Budgeting, like dieting, creates a similar response. That sense of deprivation triggers your brain to do the opposite, Klontz said. So telling yourself to spend less can make you want to spend more.
A spending plan, on the other hand, is about rewards. By figuring out where you want your money to go — toward paying off debt, saving for a home, building a nest egg or traveling the world — you’ll be motivated by a goal. “It’s much more successful” than focusing on where to cut spending, Klontz said.
How to Create a Spending Plan
Start by identifying your goals. You will be motivated to take action if you have a clear vision, such as the retirement lifestyle you desire or a destination you want to visit, he said.
Next, review your spending to see if it’s in line with your priorities. Blankenship recommended using a tool such as the free Mint mobile app or an Excel spreadsheet to monitor spending. The Mint app will automatically categorize your expenditures, which can help you to identify where your money is going.
Then rank your expenditure categories based on the amount you’re spending on each. That list will show you how you’ve prioritized your spending and whether it jibes with your goals. “Many times, people haven’t gone through the process and they get their eyes opened” when they see how much they’re spending on discretionary items, Blankenship said.
To get your spending aligned with your priorities, Todd Tresidder, a financial coach at FinancialMentor.com, said you should ask these two questions about each expenditure:
- Are you getting the highest and best value for your money?
- Is the purchase taking you toward or away from your goals?
Unlike typical budgeting questions that involve deciding what to cut back or eliminate, this approach never requires asking whether you can do without something. Instead, these questions focus on what you want and aligning your spending accordingly. “It’s a very positive experience,” he said.
For example, you often hear how buying an expensive cup of coffee daily can put a dent in your wallet. But if you work from home, going to the coffee shop can get you out of the house and break up the work day. However, if you’re stopping at a coffee shop everyday because you’re too lazy to make a pot of coffee, that’s a waste of money, Tresidder said.
After a few months, you’ll start asking these questions automatically at the point of spending, he said. Then your spending will drop effortlessly as you align expenditures with your values.
If you need extra help, Klontz recommended that you write down your goals and hang the list where you can see it. That visual daily reminder can help keep you motivated and on track.